DOWN AND OUT IN PARIS AND BERLIN

May 26, 2004

Europe is a great place to visit -- but don't try to find a job there. Unemployment averaged 8.8 percent in Europe last year compared to 6.1 percent in the United States. Over the last 12 years, America's worst unemployment rate was better than Europe's best unemployment rate, says William Conerly (National Center for Policy Analysis).

What's wrong with Europe? Why should it take so long to find work in such developed countries as France or Germany? There are a number of reasons for Europe's disappointing performance.

First, unemployment insurance benefits are more generous in Europe than in the United States. The "replacement rate," the portion of previous income replaced by unemployment insurance benefits, is generally much higher there. According to a study by the Organization for Economic Cooperation and Development (OECD):

Although lower-wage American workers often receive 50 percent of their former wages, the replacement rate is much lower for high-income workers because of ceilings on benefits.

Thus, in the United States, unemployment benefits replaced an average of 25 percent to 29 percent of a worker's wages in 1995.

In comparison, benefits are a much higher percentage of former earnings in a number of European countries, including Belgium (51 percent), France (58 percent), Switzerland (70 percent) and Denmark (71 percent).

The impetus to find another job falls as replacement rates rise, explains Conerly.

America can take some lessons from the European experience. Unemployment insurance benefits must be accompanied by a strong work-search expectation. Rapid reemployment is best for the unemployed person, and best for the economy as a whole. The worst case scenario would be for states to increase unemployment benefits -- or Congress to extend them once again -- while reducing the expectation that recipients go out and find work.

Source: William Conerly, "European Unemployment: Lessons for the United States," Brief Analysis No. 475, May 26, 2004, National Center for Policy Analysis.